This legislative session has been marked by an extremely lengthy impasse on the budget. That impasse has been broken, and we are seeing a flurry of legislation being adopted as the Legislature tries to wind up the session. There are a number of bills that have been, or will be, passed that will have a significant impact on real property practice. Space limitations prevent our coverage of all of them in a single article. In order to provide a substantive discussion we will cover further legislation in subsequent articles.

Good Funds Settlement Act, Session Law 2001-420

The Good Funds Settlement Act has been amended in an attempt to deal with the concern over disbursing funds drawn on a lender who is approved by HUD but is not a member of FDIC. This amendment was signed into law on September 22, 2001.

As a fundamental premise, it is unethical to disburse funds from an attorney’s trust account that have only been provisionally credited by the depository bank. As a result of economic and transactional pressures, the Good Funds Settlement Act was adopted in order to permit such disbursements in certain circumstances. The mortgage lending industry lobbied extensively to secure as inclusive a list as possible. This lobbying effort resulted in the inclusion of the category of HUD approved lenders. The problem with this category is that removal from HUD’s approved list usually occurs only after insolvency has occurred. The other categories typically involve regulatory oversight that can result in revocation of approval before the lender becomes insolvent. An attorney can check into the lender’s status, can perform any and all reasonable due diligence inquiries, can follow the statute to the letter and spirit, and still be faced with a loan funding check being returned on the trust account for insufficient funds. This is not a hypothetical situation but one that has occurred several times in recent years. There have been several failures of this type of lender in the last two years as the mortgage-refinancing boom collapsed. Several North Carolina attorneys incurred financial losses as a result of these failures.

This amendment is an attempt to correct this problem. Some check issuers that should have been logically included have been added. The mortgage lending industry was again successful in preventing adoption of provisions that would not permit disbursal based on provisional credits applied to checks from, essentially, unregulated lenders. They successfully argued that such concerns would be addressed by new laws regulating mortgage brokers.

NCGS Sec. 45A-4(2) adds to the list of approved governmental check issuers "an agency or

instrumentality of the United States, including an agricultural credit association". NCGS Sec. 45A-4(7) substitutes "A check drawn on the account of or issued by a mortgage banker registered under Article 19 of Chapter 53 of the General Statutes that has posted with the Commissioner of Banks a surety bond in the amount of at least three hundred thousand dollars

($300,000). The surety bond shall be in a form satisfactory to the Commissioner and shall run to the State for the benefit of any settlement agent with a claim against the licensee for a dishonored check" for the HUD approved mortgagee language.

This new language will ultimately expand the list of approved issuers, but does provide a measure of protection. The major concern for attorneys is that the bond is so low that it will be exhausted by relatively few funding checks returned for insufficient funds issued by an insolvent lender. The amendment has been passed in two sections in order to coordinate with the mortgage banking legislation. The first section is effective January 1, 2002 and refers to registration under Article 19 of Chapter 53 and the second section, effective July 1, 2002, refers to "licensed".

It is extremely important to remember that this statute does not preempt the ethical requirement of the North Carolina State Bar, that a closing attorney must be financially able to promptly cover a bounced lenders check if there has been a disbursement based upon provisional credit. This statute also does not require an attorney to disburse before funds are irrevocably credited to the trust account. We recognize that refusal to do so will likely result in a loss of business for the attorney.

Register of Deeds Changes and Enterprise Reinstatement

Session Law 2001-390, House Bill 1073

Session Law 2001-390, House Bill 1073

This act increases recording fees and adopts needed business entity reinstatement procedures. It also implements some standardization requirements for recording instruments that should prove to be a major problem for closing attorneys for some time to come.

G.S. 161-10(a) recording fees are increased as follows:

(1) Instruments in general such as deeds will be twelve dollars ($12.00) for the first page plus three dollars ($3.00) for each additional page or fraction.

(2) Deeds of Trust, Mortgages, and Cancellation of Deeds of Trust and Mortgages will be twelve dollars ($12.00) for the first page plus three dollars ($3.00) for each additional page or fraction. (No fee for recording records of satisfaction, or the cancellation of record by any other means)

(3) For each original or revised plat recorded twenty-one dollars ($21.00) (no change) per sheet or page; furnishing a certified copy of a plat increased to five dollars ($5.00).

(4) For furnishing a certified copy of an instrument ($5.00) for the first page, plus two dollars ($2.00) for each additional page or fraction.

(5) Comparing and certifying a copy of any instrument filed for registration, when the copy is furnished by the party filing the instrument for registration and at the time of filing will be five dollars ($5.00).

(6) For registering or filing any document not in compliance with the recording standards adopted under G.S. 161-14(b), the fee shall be twenty-five dollars ($25.00) in addition to all other applicable recording fees.

These increases are effective January 1, 2002. Fees for recording of right of way plans under NCGS Sec. 161-10(4) are increased retroactively to January 1, 2001.

A new section has been added to Chapter 161. NCGS Sec. 161-11.3 provides that "Ten percent (10%) of the fees collected pursuant to G.S. 161-10 and retained by the county shall be set aside annually and placed in a non reverting Automation Enhancement and Preservation Fund, the proceeds of which shall be expended on computer and imaging technology in the office of the register of deeds."

NCGS Sec. 161-14, which imposes document requirements for recordation, has been extensively rewritten. It is our expectation that this legislation will likely produce such a quantity of invective during the next several years, that Register of Deeds offices will be easily recognizable by the blue miasma lingering in the vicinity. The Real Property Section of the North Carolina Bar Association worked very hard to try to get the more objectionable provisions modified. They were partially successful, but met with stiff opposition from the Registers of Deeds Association.

NCGS Sec. 161-14 (a) adds the following italicized language to the provision; "After the register of deeds has determined that all statutory and locally adopted prerequisites for recording have been met, the register of deeds shall immediately register all written instruments presented to him for registration." There are some other minor changes in an attempt to make the statute gender neutral. Obviously, this attempt was not completely successful. It would appear that this language was included in order to make compliance obligatory on the Register of Deeds.

NCGS Sec. 161-14 (b) contains the provisions that will produce a great deal of difficulty for real property practitioners for quite some time.

"All instruments presented for registration on paper shall meet all of the following requirements:

(1) Be eight and one-half inches by eleven inches or eight and one-half inches by fourteen inches.

(2) Have a blank margin of three inches at the top of the first page and blank margins of one-half inches on the remaining sides of the first page and on all sides of subsequent pages.

(3) Be typed or printed in black on white paper in a legible font. A font size no smaller than 10 points shall be considered legible. Blanks in an instrument may be completed in pen and corrections to an instrument may be made in pen.

(4) Have text typed or printed on one side of a page only.

1. State the type of instrument at the top of the first page.

If an instrument does not meet these requirements, the register of deeds shall register the instrument after collecting the fee for nonstandard documents as required by G.S. 161-10(a)(19) in addition to all other applicable recording fees. However, if an instrument fails to meet the requirements because it contains print in a font size smaller than 10 points, the register of deeds may register the instrument without collecting the fee for nonstandard documents if, in the discretion of the register of deeds, the instrument is legible.

NCGS Sec. 161-14 (d) For the purposes of this section, the term

"instrument" means all of the following for which a fee is collected under G.S. 161-10(a):

(1) Instruments in General.

(2) Deeds of Trust, Mortgages, and Cancellation of Deeds of Trust and Mortgages.

(3) Uniform Commercial Code filings.

(4) Torrens Registrations.

(5) Master Forms."

The North Carolina Bar Association standard forms do not meet the requirements of this section in three ways. They do not meet the one half inch margin requirement, the font size requirement and many are two sided documents. The language providing that "if an instrument fails to meet the requirements because it contains print in a font size smaller than 10 points, the register of deeds may register the instrument without collecting the fee for nonstandard documents if, in the discretion of the register of deeds, the instrument is legible" was one of the provisions included as a result of the efforts of the North Carolina Bar Association Real Property Section. While this provision would permit recordation of small font documents, application of the non-standard document fee would be discretionary with the local Register of Deeds and will likely be inconsistent from county to county. The Real Property Section is working diligently to have forms conforming to the margin and one-side requirements available by the effective date of the amendment. If the font size requirement is met, most documents will require additional pages, which will increase their cost as well as the recording cost. (Three dollars per page). Most, if not all, Deeds of Trust will be non-standard and an extra twenty-five dollars will need to be collected or else the closing will stall.

This section of the act becomes effective with respect to instruments executed on or after July 1, 2002. It is important to note that the effective date applies to the execution of the instruments, not the recording. This will result in a minor grace period existing for the end of the month closings occurring during June of 2002. As a practical matter, attorneys will need to tack on an additional twenty-five dollar recording fee, since it will be unlikely that lenders will modify their forms. There is some merit in what this act is trying to achieve. As we move closer to the process of document imaging being the standard for archival purposes, standardization of document formats becomes increasingly important. Documents with narrow margins may require reduction. Documents with narrow margins and small fonts may not be legible after reduction. Documents that are folded at the top will require special handling also. Documents that are larger or significantly smaller will also require special handling. In Register of Deeds offices located in large metropolitan counties, this special handling produces a bottleneck in the flow of the recording process. On the other hand, a handwritten deed, lease easement, renunciation or the like, will require a twenty-five dollar penalty in order to record them. This is true even if they are unquestionably legible and meet all of the other requirements. If so, a question arises as to whether the non-standard document fee is reasonable in such situations. It is not difficult to envision a situation where a crucial document that conforms to the purpose of this legislation is refused registration because it does not meet the technical requirements and the person does not have the fee. The office of the Register of Deeds is a public repository for documents and instruments. If the public is unable to avail itself the protections inherent in the recording acts, the office is not serving its purpose. If economic loss results from such arbitrary requirements, there are obvious due process implications. It seems that when the public purposes of the office of the Register of Deeds are considered, that perhaps this bill goes too far, too fast in attempting to standardize the process.

NCGS Sections 55-14-22, 55A-14-22, G.S. 57C-6-03(c), G.S. 59-84.4(h) and G.S. 55D-21(d), as enacted by House Bill 385 of the 2001 General Assembly, have been amended to remove the five-year reinstatement limitation on business entities. These chapters regulate corporations, nonprofit corporations, limited liability companies and registered limited liability partnerships. The newly created Chapter 55D consolidates the filing requirements of Chapter 55, 55A, 55B, 57C, or 59 of the General Statutes into one chapter. NCGS Sec. 55-4-01(g), 55A-4-01(f), 57C-2-30(f) which control the use of the name of a dissolved business entity, have been amended to conform to the new reinstatement privileges.

The Chapter 55 amendments are included here as being representative of the amendments of all chapters.

"§ 55-14-22. Reinstatement following administrative dissolution.

(a) A corporation administratively dissolved under G.S. 55-14-21 may apply to the Secretary of State for reinstatement. The application must:

(1) Recite the name of the corporation and the effective date of its administrative dissolution; and

(2) State that the ground or grounds for dissolution either did not exist or have been eliminated.

(3) Reserved.

(4) Repealed by Session Laws 1995, c. 539, s. 6.

(a1) If, at the time the corporation applies for reinstatement, the name of the corporation is not distinguishable from the name of another entity authorized to be used under G.S. 55-4-01, then the corporation must change its name to a name that is distinguishable upon the records of the

Secretary of State from the name of the other entity before the Secretary of State may prepare a certificate of reinstatement.

(b) If the Secretary of State determines that the application contains the information required by

subsection (a) of this section, that the information is correct, and that the name of the corporation complies with G.S. 55-4-01 and any other applicable section, the Secretary of State shall cancel the certificate of dissolution and prepare a certificate of reinstatement that recites the Secretary of State's determination and the effective date of reinstatement, file the original of the certificate, and mail a copy to the corporation.

(c) When the reinstatement is effective, it relates back to and takes effect as of the date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred, subject to the rights of any person who reasonably relied to his prejudice upon the certificate of dissolution."

G.S. 55-4-01(g) reads as rewritten:

"(g) The name of a corporation dissolved under Article 14 may not be used by another corporation until one of the following occurs:

(1) In the case of a voluntary dissolution, the expiration of 120 days after the effective date of the dissolution.

(2) In the case of an administrative dissolution, the expiration of five years after the effective date of the administrative dissolution.

(3) The dissolved corporation changes its name to a name that is distinguishable upon the records of the Secretary of State from the names of other business corporations, nonprofit corporations, limited partnerships, or limited liability companies organized or transacting business in this State."

In summary, the reinstatement period will be indefinite. If the entity name is still available, it may be used by the reinstating entity. Five years after administrative dissolution, the entity name becomes available for use by another enterprise. If it is used by another enterprise, the reinstated entity must change its name. Section 14 of the bill is a legislative directive requiring the Secretary of State to "report to the General Assembly by June 30, 2003, on whether a time limit should be placed upon the period of time within which an entity may be permitted to apply for reinstatement from administrative dissolution or revocation." There are a significant number of business entities that were formed for the sole purpose of taking title to real estate. It is not at all unusual for these entities to have been dissolved for decades without transferring title to the land. The usefulness of this legislation should largely outweigh any potential for abuse. It may be useful for real property practitioners to communicate this to the Secretary of State.

This act also provides that the effect of reinstatement of a limited liability partnership under Chapter 59 shall be the same as for a corporation under G.S. 55-14-22. When a reinstatement is effective, it relates back to and takes effect as of the date of the administrative dissolution. The corporation is entitled to resume carrying on its business as if the administrative dissolution had never occurred. This right is limited by being subject to the rights of any person prejudiced by reasonably relying on the certificate of dissolution.

These amendments became effective August 26, 2001 and apply retroactively to applications for reinstatement made on or after December 1, 1999. Section 15, which amends the newly created Chapter 55, becomes effective January 1, 2002.